Voodoo Health Economics

New Krugman:

For one thing, even if you buy the premise that competition would reduce health care costs, the idea that it could cut costs enough to make insurance affordable for Americans with a history of cancer or other major diseases is sheer fantasy.

Beyond that, there’s no reason to believe in these alleged cost reductions. Insurance companies do try to hold down “medical losses” — the industry’s term for what happens when an insurer actually ends up having to honor its promises by paying a client’s medical bills. But they don’t do this by promoting cost-effective medical care.

Instead, they hold down costs by only covering healthy people, screening out those who need coverage the most — which was exactly the point Mrs. Edwards was making. They also deny as many claims as possible, forcing doctors and hospitals to spend large sums fighting to get paid.

And the international evidence on health care costs is overwhelming: the United States has the most privatized system, with the most market competition — and it also has by far the highest health care costs in the world.

Yet the McCain health plan — actually a set of bullet points on the campaign’s Web site — is entirely based on blind faith that competition among private insurers will solve all problems.

Click here for the rest.

As a rule of thumb, of course, competition in most markets does indeed result in better products and services at lower prices, generally benefiting the consumer. But that’s just a rule of thumb, not an economic “law.” The reality is that there are many markets that are just too weird, for various reasons, to conform to such rules of thumb. Not being an economist, it’s difficult for me to articulate exactly why the health insurance market falls into the weird category, but much of the reason is that the service here is all about pooling financial risk: the incentive for insurance businesses to minimize or eliminate such risk, that is, sick people, almost always overwhelms other factors, rendering the concept of free market health insurance problematic at best. That is, as Krugman observes, the whole idea of pooling risk is subverted by the profit motive, which skews coverage toward those who need it least, the young and the healthy. Given that this issue is an inherent aspect of the entire health insurance market, it is highly unlikely that more competition would do much, if anything, to lower rates for the sick and the old, the people who need it most.

If that made no sense at all, which is probable, go read this, which was written by an actual economist, Duncan Black, a.k.a. Atrios, who writes my favorite blog Eschaton.

It continues to horrify me how Republicans successfully employ an inaccurate and dumbed-down version of economics to benefit their base, the wealthy elite.

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